The Internal Revenue Service has indicated that federal solar tax credits extend to battery systems added as retrofits -- a policy that could “open the floodgates” for residential solar installers eager to add energy storage to their mass-market offerings.

That’s how GTM Research analyst Brett Simon summed up a letter from the IRS, released Friday (PDF), in reply to a query from an unnamed married couple. They claimed a federal Investment Tax Credit (ITC) for a battery, inverter, wiring and software they added to their existing rooftop PV system, set up so that it will only store energy from the solar panels, and otherwise be available day or night to respond to power outages or to reduce overall load.

The letter finds that, under these operating restrictions, the entire cost of the retrofit is subject to the 30 percent tax credit -- as long as it only charges from the sun. Specifically, the letter states that the investment “meets the definition of a ‘qualified solar electric property expenditure’ under § 25D(d)(2) of the Code, and therefore, you may claim a tax credit on this Battery.”

It’s important to note that this letter concludes with a statement that it’s directed “only to the taxpayer who requested it,” and that “Section 6110(k)(3) of the Code provides it may not be used or cited as precedent.” It also notes that it hasn’t investigated the couple’s system logs or other records to see that it’s operating in 100 percent solar charging mode.

Still, for an industry hungry for some guidance on what could be a hot new market opportunity, Friday’s letter adds an important new piece to the record of such so-called “private letter” rulings, said Simon. Previous private letters have led to the legal understanding that new solar-storage systems were eligible for the ITC, but Friday’s letter is the first to specifically address retrofits.

“It's just a single case,” he said, “but is nevertheless important because it reveals how the IRS views retrofits, and could lead to a future guidance that allows for all retrofits of storage to take the ITC. If that happened, the floodgates would open.”

Adding batteries to residential solar systems remains an expensive proposition, the price drops of lithium-ion batteries has helped. Median system prices stood at $2,900 per kilowatt-hour in the first quarter of 2018, Simon noted.

Beyond a handful of early adopters, these additional costs have had the effect of limiting solar-storage uptake to a handful of markets such as California, with its lucrative Self-Generation Incentive Program, or Hawaii, where solar-storage makes economic sense under the state’s Customer Self-Supply Program.

Looking ahead, solar installers are facing state-by-state rollback of net metering rules that provide their core revenues. In some solar-rich markets, utilities and regulators are considering demand charges, which would assign costs based on a customer’s peak energy usage, further eroding the value of standalone solar.

Amid these conditions, many solar installers are pursuing storage as an add-on to new systems. Retrofits are an opportunity to sell existing customers a new service, one that bolsters declining NEM credits and cushions against demand charges, said Simon.

Millions of existing solar rooftops adds up to huge market potential -- even if only a fraction of customers are convinced to add batteries under this private letter ruling. “Even if only 1 percent of existing solar PV systems add a storage system, that would still lead to 4x more grid-interactive residential storage systems deployed than the cumulative total as of the end of 2017," said Simon.

This metric does underscore the relatively tiny number of residential battery-solar systems compared to solar-only homes. Still, it’s a booming market in the states where it makes economic sense.

According to the most recent GTM Research-Energy Storage Association U.S. Energy Storage Monitor, nine new grid-connected home energy storage systems were deployed per day through the third quarter of 2017, totaling 4.2 megawatts, amounting to growth of 202 percent year-over-year.